The DSCR long-term rental loan product has been a blessing for many loan originators over the past 15 months. While the fix & flip volume has dropped, there has been an enormous demand for rental financing. It’s been great to see many originators take advantage of this opportunity and hit loan volume records over the past year.
These loans are fairly easy to originate if secured by one property. Most of the originators in our network have started advertising DSCR loans as part of their offering, while others have kept it as a private offering for their existing clients who typically flip houses. It’s so attractive, I’ve seen several companies that focus on large commercial real estate bridge loans now offering DSCR loans for residential properties.
Many originators fund DSCR loans using their balance sheet and immediately sell to the secondary market, which has a huge appetite for this product. Not all institutional loan buyers consider long-term rental loans, but there are still plenty of options. Originators don’t even need a balance sheet for these loans. There are a few companies that offer a wholesale program to fund these loans with very attractive pricing. If you can find one that doesn’t charge points, it could be an ideal partnership.
As tempting as it is, there are a lot of lenders in our network that have no interest in this hot new loan product. I’ve asked several lenders why they don’t want to originate DSCR loans. Below are a few of the responses (not in their exact words).
DSCR WILL BE SHORT-LIVED
Lender: The institutional capital will stop buying these loans in the near future.
My Response: Why not take advantage of it while it’s hot and earn additional revenue?
Lender: I don’t want to advertise a loan program and then have to shelf it in a short period of time. I prefer to focus on short-term lending.
DSCR IS NOT PRIVATE LENDING
Lender: Private lending is only for short-term. It seems odd to offer permanent financing.
My Response: If your borrowers want DSCR, why not offer it to them in-house? They’ll get it from your competitors, and there’s a risk losing them as a client for short-term loans.
Lender: Good point.
NOT ENOUGH DEMAND
Lender: My borrowers only flip properties. None of them are acquiring rentals or holding post-rehab/construction.
My Response: What if the market shifts and it becomes more difficult to sell?
Lender: Then I’ll shift with the market and consider originating rental loans down the road.
TOO MANY LOAN PROGRAMS
Lender: I don’t want to offer too many loan programs. I prefer to stay in my lane.
My Response: You’d still be originating a private mortgage. Your borrowers most likely don’t want to deal with a different lender for the takeout.
Lender: It’s OK. Another lender can have the take-out business.
INTEREST RATES ARE GOING UP
Lender: When rates go up, DSCR lending is done.
My Response: Bank rates will go up too. Investors will always need an alternative.
Lender: The numbers won’t make sense, and the LTVs will be too low for most investors.
F@#% WALL STREET!
Lender: I will never do business with institutional capital providers. Wall Street money is unreliable. Do you remember April 2020?
My Response: OK.
Lender: We have lots of discretionary private capital and more than enough deal flow for short-term loans.
I find that most lenders who reject the idea of originating DSCR loans have been established long before institutional capital entered the private lending space, and they don’t see a need to change their capital model, or expand their product offering. This is good news for loan originators who are all in on funding DSCR loans and don’t need more competition.
The fundamental reason the DSCR program is so powerful is that the long-term hold is now a popular strategy for many real estate investors who have historically been flippers. A lender offering both rehab loans and the long-term DSCR loan can double-dip with two separate loans for the same property and earn extra revenue. The first loan is acquisition and rehab. The DSCR loan is the take-out, and they are so easy to originate. It’s surprising to me that a lot of lenders would miss out on that additional opportunity.
So is the DSCR loan product a fad, or will it continue to play a big role in private mortgage lending in the future? Perhaps it all depends on what happens with interest rates over the next year and whether the demand from institutional investors continues. It’s a fun topic, and I will continue to have this discussion with various players in the private lending space.
